form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For The Quarterly Period Ended March 31, 2009
OR
[ ]
TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The
Transition Period From ____________To_____________.
Commission
File number 0-11733
CITY
HOLDING COMPANY
(Exact
name of registrant as specified in its charter)
West Virginia
|
55-0619957
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
25
Gatewater Road
|
|
Charleston,
West Virginia
|
25313
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(304)
769-1100
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant has (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer [ ]
|
|
Accelerated
filer [X]
|
|
|
|
Non-accelerated
filer [ ]
|
|
Smaller
reporting company
[ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practical date.
Common
stock, $2.50 Par Value – 15,962,719 shares as of May 6, 2009.
FORWARD-LOOKING
STATEMENTS
All
statements other than statements of historical fact included in this Quarterly
Report on Form 10-Q, including statements in Management’s Discussion and
Analysis of Financial Condition and Result of Operations are, or may be deemed
to be, forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such information involves risks and uncertainties that could result in the
Company’s actual results differing from those projected in the forward-looking
statements. Important factors that could cause actual results to differ
materially from those discussed in such forward-looking statements include, but
are not limited to: (1) the Company may incur additional loan loss
provision due to negative credit quality trends in the future that may lead to a
deterioration of asset quality; (2) the Company may incur increased charge-offs
in the future; (3) the Company may experience increases in the default rates on
previously securitized loans that would result in impairment losses or lower the
yield on such loans; (4) the Company may not continue to benefit from strong
recovery efforts on previously securitized loans resulting in improved yields on
these assets; (5) the Company could have adverse legal actions of a
material nature; (6) the Company may face competitive loss of customers; (7) the
Company may be unable to manage its expense levels; (8) the Company may have
difficulty retaining key employees; (9) changes in the interest rate environment
may have results on the Company’s operations materially different from those
anticipated by the Company’s market risk management functions; (10) changes in
general economic conditions and increased competition could adversely affect the
Company’s operating results; (11) changes in other regulations and government
policies affecting bank holding companies and their subsidiaries, including
changes in monetary policies, could negatively impact the Company’s operating
results; (12) the Company may experience difficulties growing loan and deposit
balances; (13) the current economic environment poses significant challenges for
us and could adversely affect our financial condition and results of
operations; (14) continued deterioration in the financial condition of the U.S.
banking system may impact the valuations of investments the Company has made in
the securities of other financial institutions resulting in either actual losses
or other than temporary impairments on such investments; and (15) the United States
government’s plan to purchase large amounts of illiquid, mortgage-backed and
other securities from financial institutions may not be effective and/or it may
not be available to us. Forward-looking statements made herein reflect
management’s expectations as of the date such statements are made. Such
information is provided to assist stockholders and potential investors in
understanding current and anticipated financial operations of the Company and is
included pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The Company undertakes no obligation to update
any forward-looking statement to reflect events or circumstances that arise
after the date such statements are made.
City
Holding Company and Subsidiaries
PART
I
|
Financial
Information
|
Pages
|
|
|
|
Item
1.
|
|
4-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
2.
|
|
19-33
|
Item
3.
|
|
33
|
Item
4.
|
|
33
|
|
|
|
PART
II
|
Other
Information
|
|
|
|
|
Item
1.
|
|
34
|
Item
1A.
|
|
34
|
Item
2.
|
|
34
|
Item
3.
|
|
34
|
Item
4.
|
|
34
|
Item
5.
|
|
34
|
Item
6.
|
|
34
|
|
|
|
|
|
35
|
|
|
|
City
Holding Company and Subsidiaries
(in
thousands)
|
|
March
31
|
|
|
December
31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Note
A)
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
43,757 |
|
|
$ |
55,511 |
|
Interest-bearing
deposits in depository institutions
|
|
|
4,736 |
|
|
|
4,118 |
|
Cash
and Cash Equivalents
|
|
|
48,493 |
|
|
|
59,629 |
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale, at fair value
|
|
|
459,014 |
|
|
|
424,214 |
|
Investment
securities held-to-maturity, at amortized cost (approximate fair value
at March 31, 2009 and December 31, 2008 - $20,634 and $22,050,
respectively)
|
|
|
29,049 |
|
|
|
29,067 |
|
Total
Investment Securities
|
|
|
488,063 |
|
|
|
453,281 |
|
|
|
|
|
|
|
|
|
|
Gross
loans
|
|
|
1,791,308 |
|
|
|
1,812,344 |
|
Allowance
for loan losses
|
|
|
(21,980 |
) |
|
|
(22,254 |
) |
Net
Loans
|
|
|
1,769,328 |
|
|
|
1,790,090 |
|
|
|
|
|
|
|
|
|
|
Bank
owned life insurance
|
|
|
71,131 |
|
|
|
70,400 |
|
Premises
and equipment
|
|
|
61,689 |
|
|
|
60,138 |
|
Accrued
interest receivable
|
|
|
9,824 |
|
|
|
9,024 |
|
Net
deferred tax asset
|
|
|
50,297 |
|
|
|
48,462 |
|
Intangible
assets
|
|
|
57,362 |
|
|
|
57,479 |
|
Other
assets
|
|
|
28,006 |
|
|
|
33,943 |
|
Total
Assets
|
|
$ |
2,584,193 |
|
|
$ |
2,582,446 |
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$ |
313,863 |
|
|
$ |
298,530 |
|
Interest-bearing:
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
428,539 |
|
|
|
420,554 |
|
Savings
deposits
|
|
|
371,462 |
|
|
|
354,956 |
|
Time
deposits
|
|
|
1,011,736 |
|
|
|
967,090 |
|
Total
Deposits
|
|
|
2,125,600 |
|
|
|
2,041,130 |
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
124,613 |
|
|
|
194,463 |
|
Long-term
debt
|
|
|
19,023 |
|
|
|
19,047 |
|
Other
liabilities
|
|
|
33,452 |
|
|
|
47,377 |
|
Total Liabilities
|
|
|
2,302,688 |
|
|
|
2,302,017 |
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $25 per share: 500,000 shares authorized; none
issued
|
|
|
- |
|
|
|
- |
|
Common
stock, par value $2.50 per share: 50,000,000 shares authorized; 18,499,282
shares issued at March 31, 2009 and December 31, 2008, less 2,582,838 and
2,548,538
shares in treasury, respectively
|
|
|
46,249 |
|
|
|
46,249 |
|
Capital
surplus
|
|
|
102,797 |
|
|
|
102,895 |
|
Retained
earnings
|
|
|
236,127 |
|
|
|
230,613 |
|
Cost
of common stock in treasury
|
|
|
(89,595 |
) |
|
|
(88,729 |
) |
Accumulated
other comprehensive (loss):
|
|
|
|
|
|
|
|
|
Unrealized
loss on securities available-for-sale
|
|
|
(17,317 |
) |
|
|
(15,628 |
) |
Unrealized
gain on derivative instruments
|
|
|
7,502 |
|
|
|
9,287 |
|
Underfunded
pension liability
|
|
|
(4,258 |
) |
|
|
(4,258 |
) |
Total
Accumulated Other Comprehensive (Loss)
|
|
|
(14,073 |
) |
|
|
(10,599 |
) |
Total
Shareholders’ Equity
|
|
|
281,505 |
|
|
|
280,429 |
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
2,584,193 |
|
|
$ |
2,582,446 |
|
See
notes to consolidated financial statements.
City
Holding Company and Subsidiaries
(in
thousands, except earnings per share data)
|
|
Three
Months Ended March 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
28,058 |
|
|
$ |
30,992 |
|
Interest
on investment securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,062 |
|
|
|
6,064 |
|
Tax-exempt
|
|
|
409 |
|
|
|
399 |
|
Interest
on deposits in depository institutions
|
|
|
5 |
|
|
|
65 |
|
Total
Interest Income
|
|
|
34,534 |
|
|
|
37,520 |
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
9,373 |
|
|
|
12,015 |
|
Interest
on short-term borrowings
|
|
|
153 |
|
|
|
1,145 |
|
Interest
on long-term debt
|
|
|
254 |
|
|
|
441 |
|
Total
Interest Expense
|
|
|
9,780 |
|
|
|
13,601 |
|
Net
Interest Income
|
|
|
24,754 |
|
|
|
23,919 |
|
Provision
for loan losses
|
|
|
1,650 |
|
|
|
1,883 |
|
Net
Interest Income After Provision for Loan Losses
|
|
|
23,104 |
|
|
|
22,036 |
|
|
|
|
|
|
|
|
|
|
Non-interest
Income
|
|
|
|
|
|
|
|
|
Investment
securities (losses) gains
|
|
|
(2,075 |
) |
|
|
2 |
|
Service
charges
|
|
|
10,435 |
|
|
|
11,274 |
|
Insurance
commissions
|
|
|
1,933 |
|
|
|
1,038 |
|
Trust
and investment management fee income
|
|
|
707 |
|
|
|
632 |
|
Bank
owned life insurance
|
|
|
732 |
|
|
|
676 |
|
VISA
IPO Gain
|
|
|
- |
|
|
|
3,289 |
|
Other
income
|
|
|
701 |
|
|
|
407 |
|
Total
Non-interest Income
|
|
|
12,433 |
|
|
|
17,318 |
|
|
|
|
|
|
|
|
|
|
Non-interest
Expense
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
9,583 |
|
|
|
9,363 |
|
Occupancy
and equipment
|
|
|
1,909 |
|
|
|
1,597 |
|
Depreciation
|
|
|
1,211 |
|
|
|
1,133 |
|
Professional
fees
|
|
|
453 |
|
|
|
367 |
|
Postage,
delivery, and statement mailings
|
|
|
718 |
|
|
|
654 |
|
Advertising
|
|
|
863 |
|
|
|
617 |
|
Telecommunications
|
|
|
420 |
|
|
|
418 |
|
Bankcard
expenses
|
|
|
648 |
|
|
|
621 |
|
Insurance
and regulatory
|
|
|
376 |
|
|
|
338 |
|
Office
supplies
|
|
|
531 |
|
|
|
457 |
|
Repossessed
asset losses, net of expenses
|
|
|
129 |
|
|
|
32 |
|
Loss
on early extinguishment of debt
|
|
|
- |
|
|
|
1,208 |
|
Other
expenses
|
|
|
1,993 |
|
|
|
3,094 |
|
Total
Non-interest Expense
|
|
|
18,834 |
|
|
|
19,899 |
|
Income
Before Income Taxes
|
|
|
16,703 |
|
|
|
19,455 |
|
Income
tax expense
|
|
|
5,779 |
|
|
|
6,417 |
|
Net
Income
|
|
|
10,924 |
|
|
|
13,038 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.69 |
|
|
$ |
0.81 |
|
Diluted
earnings per common share
|
|
$ |
0.69 |
|
|
$ |
0.80 |
|
Dividends
declared per common share
|
|
$ |
0.34 |
|
|
$ |
0.34 |
|
Average
common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,921 |
|
|
|
16,147 |
|
Diluted
|
|
|
15,933 |
|
|
|
16,205 |
|
See notes to consolidated financial
statements.
City
Holding Company and Subsidiaries
three
Months Ended March 31, 2009 and 2008
(in
thousands)
|
|
Common
Stock
|
|
|
Capital
Surplus
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other Comprehensive Income
|
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2007
|
|
$ |
46,249 |
|
|
$ |
103,390 |
|
|
$ |
224,386 |
|
|
$ |
(80,664 |
) |
|
$ |
633 |
|
|
$ |
293,994 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
13,038 |
|
|
|
|
|
|
|
|
|
|
|
13,038 |
|
Other
comprehensive gain, net of deferred income taxes of
$4,431:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on available-for-sale securities of $2,911, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,748 |
|
|
|
1,748 |
|
Net
unrealized gain on interest rate floors of $8,165, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,899 |
|
|
|
4,899 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,685 |
|
Cash
dividends declared ($0.34 per share)
|
|
|
|
|
|
|
|
|
|
|
(5,476 |
) |
|
|
|
|
|
|
|
|
|
|
(5,476 |
) |
Issuance
of stock awards, net
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
278 |
|
|
|
|
|
|
|
273 |
|
Exercise
of 5,700 stock options
|
|
|
|
|
|
|
(115 |
) |
|
|
|
|
|
|
191 |
|
|
|
|
|
|
|
76 |
|
Excess
tax benefit on stock-basedcompensation
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Purchase
of 104,960 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,717 |
) |
|
|
|
|
|
|
(3,717 |
) |
Balances
at March 31, 2008
|
|
$ |
46,249 |
|
|
$ |
103,276 |
|
|
$ |
231,948 |
|
|
$ |
(83,912 |
) |
|
$ |
7,280 |
|
|
$ |
304,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Capital
Surplus
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other Comprehensive (Loss)
|
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2008
|
|
$ |
46,249 |
|
|
$ |
102,895 |
|
|
$ |
230,613 |
|
|
$ |
(88,729 |
) |
|
$ |
(10,599 |
) |
|
$ |
280,429 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
10,924 |
|
|
|
|
|
|
|
|
|
|
|
10,924 |
|
Other
comprehensive loss, net of deferred income taxes of 5,728:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale securities of $2,783, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,688 |
) |
|
|
(1,688 |
) |
Net
unrealized loss on interest rate floors of $2,945, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,786 |
) |
|
|
(1,786 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,450 |
|
Cash
dividends declared ($0.34 per share)
|
|
|
|
|
|
|
|
|
|
|
(5,410 |
) |
|
|
|
|
|
|
|
|
|
|
(5,410 |
) |
Issuance
of stock awards, net
|
|
|
|
|
|
|
(94 |
) |
|
|
|
|
|
|
369 |
|
|
|
|
|
|
|
275 |
|
Exercise
of 300 stock options
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
3 |
|
Purchase
of 49,363 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,242 |
) |
|
|
|
|
|
|
(1,242 |
) |
Balances
at March 31, 2009
|
|
$ |
46,249 |
|
|
$ |
102,797 |
|
|
$ |
236,127 |
|
|
$ |
(89,595 |
) |
|
$ |
(14,073 |
) |
|
$ |
281,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
City
Holding Company and Subsidiaries
(in
thousands)
|
|
Three
Months Ended March 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
10,924 |
|
|
$ |
13,038 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
and accretion
|
|
|
(61 |
) |
|
|
(439 |
) |
Provision
for loan losses
|
|
|
1,650 |
|
|
|
1,883 |
|
Depreciation
of premises and equipment
|
|
|
1,211 |
|
|
|
1,133 |
|
Deferred
income tax (benefit) expense
|
|
|
(739 |
) |
|
|
183 |
|
Accretion
of gain from sale of interest rate floors
|
|
|
(1,786 |
) |
|
|
- |
|
Net
periodic employee benefit cost
|
|
|
50 |
|
|
|
12 |
|
Loss
on early extinguishment of debt
|
|
|
- |
|
|
|
1,208 |
|
Loss
on disposal of premises and equipment
|
|
|
- |
|
|
|
111 |
|
Realized
investment securities losses (gains)
|
|
|
2,075 |
|
|
|
(2 |
) |
Increase
in value of bank-owned life insurance
|
|
|
(731 |
) |
|
|
(676 |
) |
(Increase)
Decrease in accrued interest receivable
|
|
|
(800 |
) |
|
|
692 |
|
Decrease (Increase)
in other assets
|
|
|
5,937 |
|
|
|
(19,159 |
) |
(Decrease) Increase
in other liabilities
|
|
|
(13,688 |
) |
|
|
8,643 |
|
Net
Cash Provided by Operating Activities
|
|
|
4,042 |
|
|
|
6,627 |
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Proceeds
from maturities and calls of securities held-to-maturity
|
|
|
- |
|
|
|
1,145 |
|
Proceeds
from sale of money market and mutual fund securities
available-for-sale
|
|
|
72,034 |
|
|
|
314,400 |
|
Purchases
of money market and mutual fund securities
available-for-sale
|
|
|
(121,215 |
) |
|
|
(372,304 |
) |
Proceeds
from sales of securities available-for-sale
|
|
|
86 |
|
|
|
2,065 |
|
Proceeds
from maturities and calls of securities available-for-sale
|
|
|
20,167 |
|
|
|
15,122 |
|
Purchases
of securities available-for-sale
|
|
|
(11,139 |
) |
|
|
(38,664 |
) |
Net
decrease in loans
|
|
|
19,713 |
|
|
|
62,365 |
|
Sales
of premises and equipment
|
|
|
- |
|
|
|
340 |
|
Purchases
of premises and equipment
|
|
|
(2,762 |
) |
|
|
(1,093 |
) |
Investment
in bank-owned life insurance
|
|
|
- |
|
|
|
(3,000 |
) |
Redemption
of VISA stock
|
|
|
- |
|
|
|
2,334 |
|
Net
Cash Used in Investing Activities
|
|
|
(23,116 |
) |
|
|
(17,290 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in noninterest-bearing deposits
|
|
|
15,333 |
|
|
|
(3,585 |
) |
Net
increase in interest-bearing deposits
|
|
|
69,137 |
|
|
|
32,149 |
|
Net
(decrease) in short-term borrowings
|
|
|
(69,850 |
) |
|
|
(5,702 |
) |
Proceeds
from long-term debt
|
|
|
- |
|
|
|
16,495 |
|
Repayment
of long-term debt
|
|
|
(21 |
) |
|
|
(29 |
) |
Redemption
of trust preferred securities
|
|
|
- |
|
|
|
(17,569 |
) |
Purchases
of treasury stock
|
|
|
(1,242 |
) |
|
|
(3,717 |
) |
Proceeds
from exercise of stock options
|
|
|
3 |
|
|
|
76 |
|
Excess
tax benefits from stock-based compensation arrangements
|
|
|
- |
|
|
|
6 |
|
Dividends
paid
|
|
|
(5,422 |
) |
|
|
(5,022 |
) |
Net
Cash Provided by Financing Activities
|
|
|
7,938 |
|
|
|
13,102 |
|
(Decrease)
Increase in Cash and Cash Equivalents
|
|
|
(11,136 |
) |
|
|
2,439 |
|
Cash
and cash equivalents at beginning of period
|
|
|
59,629 |
|
|
|
74,518 |
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
48,493 |
|
|
$ |
76,957 |
|
See notes to consolidated financial
statements.
March
31, 2009
Note
A – Basis of Presentation
The
accompanying consolidated financial statements, which are unaudited, include all
of the accounts of City Holding Company (“the Parent Company”) and its
wholly-owned subsidiaries (collectively, “the Company”). All material
intercompany transactions have been eliminated. The consolidated financial
statements include all adjustments that, in the opinion of management, are
necessary for a fair presentation of the results of operations and financial
condition for each of the periods presented. Such adjustments are of a normal
recurring nature. The results of operations for the three months ended March 31,
2009 are not necessarily indicative of the results of operations that can be
expected for the year ending December 31, 2009. The Company’s accounting and
reporting policies conform with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Such policies require management to make estimates and
develop assumptions that affect the amounts reported in the consolidated
financial statements and related footnotes. Actual results could differ from
management’s estimates.
The
consolidated balance sheet as of December 31, 2008 has been derived from audited
financial statements included in the Company’s 2008 Annual Report to
Shareholders. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with U.S. generally accepted
accounting principles have been omitted. These financial statements should be
read in conjunction with the financial statements and notes thereto included in
the 2008 Annual Report of the Company.
Note
B –Previously Securitized Loans
Between
1997 and 1999, the Company completed six securitization transactions involving
approximately $760 million in 125% of fixed rate, junior-lien underlying
mortgages. The Company retained a financial interest in each of the
securitizations until 2004. Principal amounts owed to investors were
evidenced by securities (“Notes”). During 2003 and 2004, the Company
exercised its early redemption options on each of those
securitizations. Once the Notes were redeemed, the Company became the
beneficial owner of the mortgage loans and recorded the loans as assets of the
Company within the loan portfolio. The table below summarizes
information regarding delinquencies, net credit recoveries, and outstanding
collateral balances of previously securitized loans for the dates
presented:
|
|
As
of and for the Three
Months
Ended
|
|
|
As
of and for the Year Ended
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
Previously
Securitized Loans:
|
|
|
|
|
|
|
|
|
|
Total
principal amount of loans outstanding
|
|
$ |
18,251 |
|
|
$ |
22,532 |
|
|
$ |
18,955 |
|
Discount
|
|
|
(14,497 |
) |
|
|
(16,507 |
) |
|
|
(14,733 |
) |
Net
book value
|
|
$ |
3,754 |
|
|
$ |
6,025 |
|
|
$ |
4,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
amount of loans between 30 and 89 days past due
|
|
$ |
754 |
|
|
$ |
819 |
|
|
$ |
999 |
|
Principal
amount of loans 90 days and above past due
|
|
|
64 |
|
|
|
78 |
|
|
|
10 |
|
Net
credit recoveries during the period
|
|
|
264 |
|
|
|
228 |
|
|
|
351 |
|
The
Company accounts for the difference between the carrying value and the total
expected cash flows from these loans as an adjustment of the yield earned on the
loans over their remaining lives. The discount is accreted to income over the
period during which payments are probable of collection and are reasonably
estimable. Additionally, the collectibility of previously securitized loans is
evaluated over the remaining lives of the loans. An impairment charge on
previously securitized loans would be provided through the Company’s provision
for loan losses if the discounted present value of estimated future cash flows
declines below the recorded value of previously securitized loans. No
such impairment charges were recorded for the three months ended March 31, 2009
and 2008, or for the year ending December 31, 2008.
As of
March 31, 2009, the Company reported a book value of previously securitized
loans of $3.8 million whereas the actual contractual outstanding balance of
previously securitized loans at March 31, 2009 was $18.3 million. The difference
(“the discount”) between the book value and the expected total cash flows from
previously securitized loans is being accreted into interest income over the
estimated remaining life of the loans.
For the
three months ended March 31, 2009 and 2008, the Company recognized $1.1 million
and $1.6 million, respectively, of interest income from its previously
securitized loans.
Note
C – Short-term borrowings
The
components of short-term borrowings are summarized below:
(
in thousands)
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
Security
repurchase agreements
|
|
$ |
122,364 |
|
|
$ |
122,904 |
|
Short-term
advances
|
|
|
2,249 |
|
|
|
71,559 |
|
Total
short-term borrowings
|
|
$ |
124,613 |
|
|
$ |
194,463 |
|
Securities sold under agreement to
repurchase were sold to corporate and government customers as an alternative to
available deposit products. The underlying securities included in repurchase
agreements remain under the Company’s control during the effective period of the
agreements.
Note
D – Long-Term Debt
The components of long-term debt are
summarized below:
(dollars
in thousands)
|
Maturity
|
|
March
31, 2009
|
|
|
Weighted
Average Interest Rate
|
|
|
|
|
|
|
|
|
|
FHLB
Advances
|
2010
|
|
$ |
2,000 |
|
|
|
6.30 |
% |
FHLB
Advances
|
2011
|
|
|
528 |
|
|
|
4.44 |
% |
Junior
subordinated debentures owed to City Holding CapitalTrust
III
|
2038
(a)
|
|
|
16,495 |
|
|
|
4.82 |
% |
Total
long-term debt
|
|
|
$ |
19,023 |
|
|
|
|
|
(a) Junior Subordinated Debentures owed
to City Holding Capital Trust III are redeemable prior to maturity at the option
of the Company (i) in whole at any time or in part from time-to-time, at
declining redemption prices ranging from 103.525% to 100.00% on June 15, 2013,
and thereafter, or (ii) in whole, but not in part, at any time within 90 days
following the occurrence and during the continuation of certain pre-defined
events.
The
Company formed a statutory business trust, City Holding Capital Trust III
(“Capital Trust III”), under the laws of Delaware. Capital Trust III
was created for the exclusive purpose of (i) issuing trust-preferred capital
securities (“Capital Securities”), which represent preferred undivided
beneficial interests in the assets of the trust, (ii) using the proceeds
from the sale of the Capital Securities to acquire junior subordinated
debentures (“Debentures”) issued by the Company, and (iii) engaging in only
those activities necessary or incidental thereto. The trust is
considered a variable interest entity for which the Company is not the primary
beneficiary. Accordingly, the accounts of the trusts are not included
in the Company’s consolidated financial statements.
The
Capital Securities issued by the statutory business trust qualify as Tier 1
capital for the Company under the Federal Reserve Board
guidelines. In March 2005, the Federal Reserve Board issued a final
rule that allows the inclusion of trust preferred securities issued by
unconsolidated subsidiary trusts in Tier 1 capital, but with stricter
limits. Under ruling, after a five-year transition period, the
aggregate amount of trust preferred securities and certain other capital
elements would be limited to 25% of Tier 1 capital elements, net of
goodwill. The amount of trust preferred securities and certain other
elements in excess of the limit could be included in Tier 2 capital, subject to
restrictions. In October 2008, the Federal Reserve Board delayed
implementation of the new limits until March 2011. The Company
expects to continue to include all of its $16 million in trust preferred
securities in Tier 1 capital. The trust preferred securities could be
redeemed without penalty if they were no longer permitted to be included in Tier
1 capital.
Note
E – Employee Benefit Plans
The
Company accounts for share-based compensation in accordance with SFAS No. 123R,
“Share-Based Payment.” A summary of the Company’s stock option
activity and related information is presented below for the three months ended
March 31:
|
|
2009
|
|
|
2008
|
|
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1
|
|
|
270,455 |
|
|
$ |
33.96 |
|
|
|
305,909 |
|
|
$ |
32.05 |
|
Granted
|
|
|
17,500 |
|
|
|
27.98 |
|
|
|
11,500 |
|
|
|
40.88 |
|
Exercised
|
|
|
(300 |
) |
|
|
13.30 |
|
|
|
(5,700 |
) |
|
|
13.30 |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
at March 31
|
|
|
287,655 |
|
|
$ |
33.62 |
|
|
|
311,709 |
|
|
$ |
32.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information regarding stock
options outstanding and exercisable at March 31, 2009, is provided in the
following table:
Ranges
of Exercise Prices
|
|
|
No.
of Options Outstanding
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Contractual Life (Months)
|
|
|
Aggregate
Intrinsic Value (in thousands)
|
|
|
No.
of Options Currently Exercisable
|
|
|
Weighted-Average
Exercise Price of Options Currently Exercisable
|
|
|
Weighted-Average
Remaining Contractual Life (Months)
|
|
|
Aggregate
Intrinsic Value of Options Currently Exercisable (in
thousands)
|
|
$ |
13.30 |
|
|
|
1,600 |
|
|
$ |
13.30 |
|
|
|
34 |
|
|
$ |
22 |
|
|
|
1,600 |
|
|
$ |
13.30 |
|
|
|
34 |
|
|
$ |
22 |
|
$ |
26.62
- $33.90 |
|
|
|
187,555 |
|
|
|
31.22 |
|
|
|
75 |
|
|
|
1 |
|
|
|
133,930 |
|
|
|
31.68 |
|
|
|
64 |
|
|
|
- |
|
$ |
35.36
- $40.88 |
|
|
|
98,500 |
|
|
|
38.52 |
|
|
|
91 |
|
|
|
- |
|
|
|
39,250 |
|
|
|
36.86 |
|
|
|
81 |
|
|
|
- |
|
|
|
|
|
|
287,655 |
|
|
|
|
|
|
|
|
|
|
$ |
23 |
|
|
|
174,780 |
|
|
|
|
|
|
|
|
|
|
$ |
22 |
|
Proceeds
from stock options totaled approximately $0.1 million during the three months
ended March 31, 2009 and 2008, respectively. Shares issued in connection with
stock option exercises are issued from available treasury shares. If no treasury
shares are available, new shares are issued from available authorized shares.
During the three months ended March 31, 2009 and March 31, 2008 all shares
issued in connection with stock option exercises and restricted stock awards
were issued from available treasury stock.
The total intrinsic value of stock
options exercised was less than $0.1 million during the three months ended March
31, 2009 and 2008, respectively.
Stock-based compensation expense
totaled $0.1 million for both the three months ended March 31, 2009 and
March 31, 2008. Unrecognized stock-based compensation expense related
to stock options totaled $0.8 million at March 31, 2009. At such date,
the weighted-average period over which this unrecognized expense was expected to
be recognized was 2.0 years.
The fair
value of the options is estimated at the date of grant using a Black-Scholes
option-pricing model. The following weighted average
assumptions were used to estimate the fair value of options granted during the
three months ended March 31:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
2.51 |
% |
|
|
3.14 |
% |
Expected
dividend yield
|
|
|
4.83 |
% |
|
|
3.33 |
% |
Volatility
factor
|
|
|
46.47 |
% |
|
|
52.89 |
% |
Expected
life of option
|
|
8.0
years
|
|
|
8.0
years
|
|
The Company records compensation
expense with respect to restricted shares in an amount equal to the fair market
value of the common stock covered by each award on the date of grant. The
restricted shares awarded become fully vested after various periods of continued
employment from the respective dates of grant. The Company is entitled to an
income tax deduction in an amount equal to the taxable income reported by the
holders of the restricted shares when the restrictions are released and the
shares are issued. Compensation is being charged to expense over the respective
vesting periods.
Restricted shares are forfeited if
officers and employees terminate prior to the lapsing of restrictions. The
Company records forfeitures of restricted stock as treasury share repurchases
and any compensation cost previously recognized is reversed in the period of
forfeiture. Recipients of restricted shares do not pay any cash
consideration to the Company for the shares, have the right to vote all shares
subject to such grant and receive all dividends with respect to such shares,
whether or not the shares have vested. Unrecognized stock-based
compensation expense related to non-vested restricted shares was
$0.9 million at March 31, 2009. At March 31, 2009, this unrecognized
expense is expected to be recognized over 3.7 years based on the weighted
average-life of the restricted shares.
A summary of the Company’s restricted
shares activity and related information is presented below for the three months
ended March 31:
|
|
2009
|
|
|
2008
|
|
|
|
Restricted
Awards
|
|
|
Average
Market Price at Grant
|
|
|
Restricted
Awards
|
|
|
Average
Market Price at Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1
|
|
|
36,175 |
|
|
|
|
|
|
31,818 |
|
|
|
|
Granted
|
|
|
6,950 |
|
|
$ |
35.04 |
|
|
|
2,775 |
|
|
$ |
40.88 |
|
Forfeited/Vested
|
|
|
(566 |
) |
|
|
|
|
|
|
- |
|
|
|
|
|
Outstanding
at March 31
|
|
|
42,559 |
|
|
|
|
|
|
|
34,593 |
|
|
|
|
|
Subsequent
to March 31, 2009, the Company’s Board of Directors approved the grant of 46,275
restricted stock awards to certain executive officers of the Company on April
29, 2009. The fair value of these restricted awards was $30.06 on the
date of grant. The vesting period for these restricted awards is
seven to twelve years with a varying number of shares vesting per
year.
The
Company provides retirement benefits to its employees through the City Holding
Company 401(k) Plan and Trust (“the 401(k) Plan”), which is intended to be
compliant with Employee Retirement Income Security Act (ERISA) section 404(c).
Any employee who has attained age 21 is eligible to participate beginning the
first day of the month following employment. Unless specifically chosen
otherwise, every employee is automatically enrolled in the 401(k) Plan and may
make before-tax contributions of between 1% and 15% of eligible pay up to the
dollar limit imposed by Internal Revenue Service regulations. The first 6% of an
employee’s contribution is matched 50% by the Company. The employer matching
contribution is invested according to the investment elections chosen by the
employee. Employees are 100% vested in both employee and employer contributions
and the earnings they generate. The Company’s total expense associated with the
retirement benefit plan approximated $0.2 million for the three month periods
ended March 31, 2009 and March 31, 2008.
The Company also maintains a defined
benefit pension plan (“the Defined Benefit Plan”) that covers approximately 300
current and former employees. The Defined Benefit Plan was frozen in 1999
subsequent to the Company’s acquisition of the plan sponsor. The Defined Benefit
Plan maintains a December 31 year-end for purposes of computing its benefit
obligations. The Company did not make any contributions to the Defined Benefit
Plan during the three months ended March 31, 2009 and 2008.
The
following table presents the components of the net periodic pension cost of the
Defined Benefit Plan:
|
|
Three
months ended
March
31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Components
of net periodic cost:
|
|
|
|
|
|
|
Interest
cost
|
|
$ |
169 |
|
|
$ |
166 |
|
Expected
return on plan assets
|
|
|
(199 |
) |
|
|
(217 |
) |
Net
amortization and deferral
|
|
|
80 |
|
|
|
63 |
|
Net
Periodic Pension Cost
|
|
$ |
50 |
|
|
$ |
12 |
|
Note
F – Commitments and Contingencies
The Company is a party to certain
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. The Company
has entered into agreements with its customers to extend credit or provide a
conditional commitment to provide payment on drafts presented in accordance with
the terms of the underlying credit documents. The Company also provides
overdraft protection to certain demand deposit customers that represent an
unfunded commitment. Overdraft protection commitments, which are
included with other commitments below, are uncollateralized and are paid at the
Company’s discretion. Conditional commitments generally include
standby and commercial letters of credit. Standby letters of credit represent an
obligation of the Company to a designated third party contingent upon the
failure of a customer of the Company to perform under the terms of the
underlying contract between the customer and the third party. Commercial letters
of credit are issued specifically to facilitate trade or commerce. Under the
terms of a commercial letter of credit, drafts will be drawn when the underlying
transaction is consummated, as intended, between the customer and a third party.
The funded portion of these financial instruments is reflected in the Company’s
balance sheet, while the unfunded portion of these commitments is not reflected
in the balance sheet. The table below presents a summary of the
contractual obligations of the Company resulting from significant
commitments:
(
in thousands)
|
|
March
31,
2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
Commitments
to extend credit:
|
|
|
|
|
|
|
Home
equity lines
|
|
$ |
131,236 |
|
|
$ |
129,794 |
|
Commercial
real estate
|
|
|
32,944 |
|
|
|
34,025 |
|
Other
commitments
|
|
|
173,672 |
|
|
|
173,522 |
|
Standby
letters of credit
|
|
|
18,324 |
|
|
|
18,388 |
|
Commercial
letters of credit
|
|
|
40 |
|
|
|
159 |
|
Loan
commitments and standby and commercial letters of credit have credit risks
essentially the same as that involved in extending loans to customers and are
subject to the Company’s standard credit policies. Collateral is obtained based
on management’s credit assessment of the customer. Management does not
anticipate any material losses as a result of these commitments.
Note
G – Total Comprehensive Income
The
following table sets forth the computation of total comprehensive
income:
|
|
Three
months ended March 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Net
income
|
|
$ |
10,924 |
|
|
$ |
13,038 |
|
|
|
|
|
|
|
|
|
|
Unrealized
security (losses) gains arising during the period
|
|
|
(7,389 |
) |
|
|
2,911 |
|
Reclassification
adjustment for losses included in income
|
|
|
4,606 |
|
|
|
2 |
|
|
|
|
(2,783 |
) |
|
|
2,913 |
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gains on interest rate floors
|
|
|
(2,945 |
) |
|
|
8,165 |
|
Other
comprehensive income before income taxes
|
|
|
5,196 |
|
|
|
24,116 |
|
Tax
effect
|
|
|
2,254 |
|
|
|
(4,431 |
) |
Total
comprehensive income
|
|
$ |
7,450 |
|
|
$ |
19,685 |
|
Note
H – Earnings per Share
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three
months ended March 31,
|
|
(in
thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
10,924 |
|
|
$ |
13,038 |
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
15,921 |
|
|
|
16,147 |
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
12 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
Shares
for diluted earnings per share
|
|
|
15,933 |
|
|
|
16,205 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.69 |
|
|
$ |
0.81 |
|
Diluted
earnings per share
|
|
$ |
0.69 |
|
|
$ |
0.80 |
|
Options
to purchase 284,055 and 59,000 shares of common stock at an exercise price
between $28.00 and $40.88 and between $39.34 and $40.88 per share were
outstanding during the first quarter of 2009 and the first quarter of 2008,
respectively, but were not included in the computation of diluted earnings per
share because the options’ exercise price was greater than the average market
price of the common shares and therefore, the effect would have been
anti-dilutive.
Note
I –Fair Value Measurements
Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standard
No. 157, (“SFAS No. 157”), “Fair Value Measurements”, which defines fair value,
establishes a framework for measuring fair value under accounting principles
generally accepted in the United States, and enhances disclosures about fair
value measurements.
SFAS No.
157 defines fair value as the exchange price that would be received to sell an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.
SFAS 157
establishes a fair value hierarchy for valuation inputs that gives the highest
priority to quoted prices in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The fair value hierarchy
established by SFAS No. 157 is as follows:
Level 1: Quoted prices
(unadjusted) or identical assets or liabilities in active markets that the
entity has the ability to access as of the measurement date.
Level 2: Significant other
observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active, and other
inputs that are observable or can be corroborated by observable market
data.
Level 3: Significant
unobservable inputs that reflect a company’s own assumptions about the
assumptions that market participants would use in pricing an asset or
liability.
The
Company used the following methods and significant assumptions to estimate fair
value for assets and liabilities recorded at fair value.
Securities Available for
Sale. Securities available for sale are reported at fair value
utilizing Level 1, Level 2, and Level 3 inputs. The fair value of
securities available for sale is determined by obtaining quoted prices on
nationally recognized securities exchanges or matrix pricing, which is a
mathematical technique used widely in the industry to value debt securities
without relying exclusively on quoted prices for the specific securities but
rather by relying on the securities’ relationship to other benchmark quoted
securities.
Dervivatives. Derivatives
are reported at fair value utilizing Level 2 inputs. The Company
obtains dealer quotations to value its customer interest rate
swaps.
Previously Securitized
Loans. Previously securitized loans are reported at fair value
utilizing Level 3 inputs. The Company utilizes an internal valuation
model that calculates the present value of estimated future cash
flows. The internal valuation model incorporates assumptions such as
loan prepayment and default rates. Using cash flow modeling techniques that
incorporate these assumptions, the Company estimated total future cash
collections expected to be received from these loans and determined the yield at
which the resulting discount would be accreted into income.
The
following table presents assets and liabilities measured at fair value on a
recurring basis,
(in
thousands)
March
31, 2009
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities Available for Sale
|
|
$ |
445,979 |
|
|
$ |
59,925 |
|
|
$ |
386,054 |
|
|
$ |
- |
|
Derivative
Assets
|
|
|
2,183 |
|
|
|
- |
|
|
|
2,183 |
|
|
|
- |
|
Previously
Securitized Loans
|
|
|
3,754 |
|
|
|
- |
|
|
|
- |
|
|
|
3,754 |
|
Derivative
Liabilities
|
|
|
2,183 |
|
|
|
- |
|
|
|
2,183 |
|
|
|
- |
|
The table
below presents a reconciliation and income statement classification of gains and
losses for all assets measured at fair value on a recurring basis for Level 3
assets for the three months ended March 31, 2009.
(in
thousands)
|
|
Previously
Securitized Loans
|
|
|
|
|
|
Beginning
balance, January 1, 2009
|
|
$ |
4,222 |
|
Principal Receipts and
Recoveries (net)
|
|
|
(704 |
) |
Accretion
|
|
|
236 |
|
Transfers into Level
3
|
|
|
- |
|
Ending
Balance, March 31, 2009
|
|
$ |
3,754 |
|
The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with accounting principles generally
accepted in the United States. These include assets that are measured
at the lower of cost or market that were recognized at fair value below cost at
the end of the period. At March 31, 2009, the Company has $19.8
million of impaired loans that are measured at fair value on a nonrecurring
basis. These assets are considered to be measured at Level 2 in the
fair value measurement hierarchy.
In
accordance with Financial Accounting Standards Board Staff Position No. 157-2,
“Effective Date of FASB Statement No. 157,” the Company adopted SFAS No. 157 for
non-financial assets and non-financial liabilities effective January 1,
2009.
The
Company used the following methods and significant assumptions to estimate fair
value for assets measured on a nonrecurring basis.
Impaired
Loans. Loans for which it is probable that payment of interest
and principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS
No. 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS No. 114). The
fair value of impaired loans is estimated using one of several methods,
including collateral value, liquidation value and discounted cash flows. Those
impaired loans not requiring an allowance represent loans for which the fair
value of the expected repayments or collateral exceed the recorded investments
in such loans. At March 31, 2009, substantially all of the impaired loans were
evaluated based on the fair value of the collateral. In accordance with SFAS No.
157, impaired loans where an allowance is established based on the fair value of
collateral require classification in the fair value hierarchy. When the fair
value of the collateral is based on an observable market price or a current
appraised value, the Company records the impaired loan as nonrecurring Level 2.
When an appraised value is not available or management determines the fair value
of the collateral is further impaired below the appraised value and there is no
observable market price, the Company records the impaired loan as nonrecurring
Level 3.
Long-lived assets held for
sale. Long-lived assets held for sale include real estate
owned. The fair value of real estate owned is based on independent
full appraisals and real estate broker’s price opinions, less estimated selling
costs. Certain properties require assumptions that are not observable
in an active market in the determination of fair value. Assets that
are acquired through foreclosure, repossession or return are initially recorded
at the lower of the loan or lease carrying amount or fair value less estimated
selling costs at the time of transfer to real estate owned. Long-lived assets
held for sale with a carrying amount of $3.3 million were written down $0.1
million, which is included in other non-interest expense, to their fair value of
$3.2 million during the three months ended March 31, 2009.
Note J–
Recent Accounting Pronouncements
In
December 2007, the FASB issued Statement No. 141 (revised 2007) (“SFAS No.
141R”), “Business Combinations.” SFAS No. 141R will significantly
change how the acquisition method will be applied to business
combinations. SFAS No. 141R requires an acquirer, upon initially
obtaining control of another entity, to recognize the assets, liabilities and
any non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and measured at fair
value on the date of acquisition rather than at a later date when the amount of
that consideration may be determinable beyond a reasonable doubt. This fair
value approach replaces the cost-allocation process required under SFAS No. 141
whereby the cost of an acquisition was allocated to the individual assets
acquired and liabilities assumed based on their estimated fair value. SFAS No.
141R requires acquirers to expense acquisition-related costs as incurred rather
than allocating such costs to the assets acquired and liabilities assumed, as
was previously the case under SFAS No. 141. Under SFAS No. 141R, the
requirements of SFAS No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities,” would have to be met in order to accrue for a
restructuring plan in purchase accounting. Pre-acquisition contingencies are to
be recognized at fair value, unless it is a non-contractual contingency that is
not likely to materialize, in which case, nothing should be recognized in
purchase accounting and, instead, that contingency would be subject to the
probable and estimable recognition criteria of SFAS No. 5, “Accounting for
Contingencies.” Reversals of deferred income tax valuation allowances and income
tax contingencies will be recognized in earnings subsequent to the
measurement
period. The
allowance for loan losses of an acquiree will not be permitted to be recognized
by the acquirer. Additionally, SFAS No. 141(R) will require new and
modified disclosures surrounding subsequent changes to acquisition-related
contingencies, contingent consideration, noncontrolling interests,
acquisition-related transaction costs, fair values and cash flows not expected
to be collected for acquired loans, and an enhanced
goodwill rollforward. SFAS No. 141(R) will be applicable to
all business combinations completed by the Company on or after January 1,
2009.
In
December 2007, the FASB issued SFAS No. 160 (“SFAS No. 160”), “Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB Statement No.
51.” SFAS No. 160 clarifies that a non-controlling interest in a subsidiary,
which is sometimes referred to as minority interest will be recharacterized as a
“noncontrolling interest” and should be reported as a component of equity. Among
other requirements, SFAS No. 160 requires consolidated net income to be reported
at amounts that include the amounts attributable to both the parent and the
non-controlling interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. SFAS No. 160
became effective for the Company on January 1, 2009 and did not have a
significant impact on the Company’s financial statements.
In March
2008, the FASB issued SFAS No. 161, (“SFAS No. 161”),"Disclosures About
Derivative Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133." SFAS No. 161 applies to all derivative instruments and related
hedged items accounted for under SFAS No. 133. SFAS No. 161
amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to amend and expand the disclosure requirements of SFAS No.
133 to provide greater transparency about (i) how and why an entity uses
derivative instruments, (ii) how derivative instruments and related hedge
items are accounted for under SFAS No. 133 and its related interpretations,
and (iii) how derivative instruments and related hedged items affect an
entity's financial position, results of operations and cash flows. To meet those
objectives, SFAS No. 161 requires qualitative disclosures about objectives
and strategies for using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative agreements. The only
derivative instruments that the Company has at March 31, 2009 are interest rate
swaps with customers while at the same time entering into an offsetting interest
rate swap with another financial institution. At March 31, 2009, the
fair value of these instruments approximated $2.2 million. The
Company adopted the provisions of SFAS No. 161 on January 1, 2009 and based on
the immateriality of the outstanding derivatives, there was no significant
impact on related disclosure in the Company's financial statements.
In June
2008, the FASB issued FSP EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities”. FSP EITF 03-6-1 clarifies whether instruments, such as
restricted stock, granted in share-based payments are participating securities
prior to vesting. Such participating securities must be included in the
computation of earnings per share under the two-class method as described in
SFAS No. 128, “Earnings per Share.” FSP EITF 03-6-1 requires companies to treat
unvested share-based payment awards that have non-forfeitable rights to dividend
or dividend equivalents as a separate class of securities in calculating
earnings per share. The Company adopted FSP EITF 03-6-1 January 1,
2009. The adoption of FSP EITF 03-6-1 did not have a material effect
on the Company’s consolidated results of operations or earnings per
share.
In April 2009, the FASB issued FSP SFAS
157-4 (“FSP SFAS 157-4”), “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly.” FSP SFAS 157-4 affirms that the objective of
fair value when the market for an asset is not active is the price that would be
received to sell the asset in an orderly transaction, and clarifies and includes
additional factors for determining whether there has been a significant decrease
in market activity for an asset when the market for that asset is not active.
FSP SFAS 157-4 requires an entity to base its conclusion about whether a
transaction was not orderly on the weight of the evidence. FSP SFAS 157-4 also
amended SFAS 157, “Fair Value Measurements,” to expand certain disclosure
requirements. FSP SFAS 157-4 is effective for interim and annual periods ending
after June 15, 2009 and the Company does not expect that the adoption of FSP
SFAS 157-4 will have a material effect on the Company’s financial
statements.
In April
2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2 (“FSP SFAS 115-2 and SFAS
124-2), “Recognition and Presentation of Other-Than-Temporary Impairments.” FSP
SFAS 115-2 and SFAS 124-2 (i) changes existing guidance for determining whether
an impairment is other than temporary to debt securities and (ii) replaces the
existing requirement that the entity’s management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security; and (b)
it is more likely than not it will not have to sell the security before recovery
of its cost basis. Under FSP SFAS 115-2 and SFAS 124-2, declines in the fair
value of held-to-maturity and available-for-sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as realized
losses to the extent the impairment is related to credit losses. The amount of
the impairment related to other factors is recognized in other comprehensive
income. FSP SFAS 115-2 and SFAS 124-2 is effective for interim and annual
periods ending after June 15, 2009 and the Company does not expect that the
adoption of FSP SFAS 115-2 and SFAS 124-2 will have a material effect on the
Company’s financial statements.
In April
2009, the FASB issued FSP SFAS 107-1 and APB 28-1 (FSP SFAS 107-1 and APB
28-1”), “Interim Disclosures about Fair Value of Financial Instruments.” FSP
SFAS 107-1 and APB 28-1 amends SFAS 107, “Disclosures about Fair Value of
Financial Instruments,” to require an entity to provide disclosures about fair
value of financial instruments in interim financial information and amends
Accounting Principles Board (APB) Opinion No. 28, “Interim Financial Reporting,”
to require those disclosures in summarized financial information at interim
reporting periods. Under FSP SFAS 107-1 and APB 28-1, a publicly traded company
shall include disclosures about the fair value of its financial instruments
whenever it issues summarized financial information for interim reporting
periods. In addition, entities must disclose, in the body or in the accompanying
notes of its summarized financial information for interim reporting periods and
in its financial statements for annual reporting periods, the fair value of all
financial instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the statement of financial position, as
required by SFAS 107. The new interim disclosures required by FSP SFAS 107-1 and
APB 28-1 will be included in the Company’s interim financial statements
beginning with the second quarter of 2009.
Critical
Accounting Policies
The
accounting policies of the Company conform with U.S. generally accepted
accounting principles and require management to make estimates and develop
assumptions that affect the amounts reported in the financial statements and
related footnotes. These estimates and assumptions are based on information
available to management as of the date of the financial statements. Actual
results could differ significantly from management’s estimates. As this
information changes, management’s estimates and assumptions used to prepare the
Company’s financial statements and related disclosures may also change. The most
significant accounting policies followed by the Company are presented in Note
One to the audited financial statements included in the Company’s 2008 Annual
Report to Shareholders. The information included in this Quarterly Report on
Form 10-Q, including the Consolidated Financial Statements, Notes to
Consolidated Financial Statements, and Management’s Discussion and Analysis of
Financial Condition and Results of Operations, should be read in conjunction
with the financial statements and notes thereto included in the 2008 Annual
Report of the Company. Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, management has identified the determination
of the allowance for loan losses, income taxes, and previously securitized loans
to be the accounting areas that require the most subjective or complex judgments
and, as such, could be most subject to revision as new information becomes
available.
Pages 23
- 27 of this Quarterly Report on Form 10-Q provide management’s analysis of the
Company’s allowance for loan losses and related provision. The allowance for
loan losses is maintained at a level that represents management’s best estimate
of probable losses in the loan portfolio. Management’s determination of the
adequacy of the allowance for loan losses is based upon an evaluation of
individual credits in the loan portfolio, historical loan loss experience,
current economic conditions, and other relevant factors. This determination is
inherently subjective as it requires material estimates including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change. The allowance for loan losses related
to loans considered to be impaired is generally evaluated based on the
discounted cash flows using the impaired loan’s initial effective interest rate
or the fair value of the collateral for certain collateral dependent
loans.
The Company is subject to federal and
state income taxes in the jurisdictions in which it conducts
business. In computing the provision for income taxes, management
must make judgments regarding interpretation of laws in those
jurisdictions. Because the application of tax laws and regulations
for many types of transactions is susceptible to varying interpretations,
amounts reported in the financial statements could be changed at a later date
upon final determinations by taxing authorities. On a quarterly
basis, the Company estimates its annual effective tax rate for the year and uses
that rate to provide for income taxes on a year-to-date basis.
The
amount of unrecognized tax benefits could change over the next twelve months as
a result of various factors. However, management cannot currently estimate
the range of possible change.
The Company is currently open to audit
under the statute of limitations by the Internal Revenue Service for the years
ended December 31, 2005 through 2007. The Company and its subsidiaries
state income tax returns are open to audit under the statute of limitations for
the year ended December 31, 2007.
Note B,
beginning on page 8 of this Quarterly Report on Form 10-Q, and pages 27-28
provide management’s analysis of the Company’s previously securitized
loans. The carrying value of previously securitized loans is
determined using assumptions with regard to loan prepayment and default rates.
Using cash flow modeling techniques
that incorporate these assumptions, the Company estimated total future cash
collections expected to be received from these loans and determined the yield at
which the resulting discount would be accreted into income. If, upon
periodic evaluation, the estimate of the total probable collections is increased
or decreased but is still greater than the sum of the original carrying amount
less subsequent collections plus the discount accreted to date, and it is
probable that collection will occur, the amount of the discount to be accreted
is adjusted accordingly and the amount of periodic accretion is adjusted over
the remaining lives of the loans. If, upon periodic evaluation, the discounted
present value of estimated future cash flows declines below the recorded value
of previously securitized loans, an impairment charge would be provided through
the Company’s provision for loan losses. Please refer to Note B of
Notes to Consolidated Financial Statements, on pages 8 - 9 for further
discussion.
On a
quarterly basis, the Company performs a review of investment securities to
determine if any unrealized losses are other than temporarily
impaired. Management considers the following, amongst other things,
in its determination of the nature of the unrealized losses, (i) the length
of time and the extent to which the fair value has been less than cost,
(ii) the financial condition and near-term prospects of the issuer, and
(iii) the intent and ability of the Company to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated recovery in
fair value. As a result of this review, the Company recognized $2.2
million of other than temporary impairment charges during the quarter ended
March 31, 2009. These impairment charges were related to pooled bank
trust preferreds with a remaining book value of $8.9 million. At
March 31, 2009, the Company’s portfolio of perpetual callable preferred
securities, preferred securities, and trust preferred securities primarily
invested in regional banks have a total book value of $109.7 million and
unrealized losses of $21.7 million. The Company continues to actively
monitor the market values of these investments along with the financial strength
of the issuers behind these securities, as well as our entire investment
portfolio. Based on the market information available the Company
believes that the recent declines in market value are temporary and that the
Company has the ability and intent to hold these securities until the temporary
losses recover or the securities are called or mature. The Company
cannot guarantee that such securities will recover and if additional information
becomes available in the future to suggest that the losses are other than
temporary, the Company may need to record impairment charges in future
periods.
Financial
Summary
Three
Months Ended March 31, 2009 vs. 2008
The
Company reported consolidated net income of $10.9 million, or $0.69 per diluted
common share, for the three months ended March 31, 2009, compared to $13.0
million, or $0.80 per diluted common share for the first three months of 2008.
Return on average assets (“ROA”) was 1.70% and return on average equity (“ROE”)
was 15.3% for the first three months of 2009, compared to 2.09% and 17.4%,
respectively, for the first three months of 2008.
The
Company’s net interest income for the first three months of 2009 increased $0.8
million compared to the first three months of 2008 (see Net Interest Income). The
Company recorded a provision for loan losses of $1.7 million for the first three
months of 2009 while $1.9 million was recorded for the first three months of
2008 (see Allowance and
Provision for Loan Losses). The Company recorded $2.2 million
of investment impairment losses in the first three months of 2009 (see Non-Interest Income and
Expense) while no such impairment charges were recognized in the first
quarter of 2008. As further discussed under the caption Non-Interest
Income and Expense, excluding investment impairment losses and the gain from the
Visa initial public offering, non-interest income increased $0.5 million from
the three months ended March 31, 2008, to the three months ended March 31,
2009. Excluding the
loss on
the early redemption of the trust preferred securities in the first quarter of
2008, non-interest expenses for the three months ended March 31, 2009 increased
$0.1 million from the three months ended March 31, 2008.
Net
Interest Income
Three
Months Ended March 31, 2009 vs. 2008
The
Company’s tax equivalent net interest income increased $0.9 million, or 3.5%,
from $24.1 million during the first three months of 2008 to $25.0 million during
the first three months of 2009, as interest expense on deposits and other
interest bearing liabilities decreased more quickly than interest income from
loans and investments. The Company’s reported net interest margin increased from
4.40% for the quarter ended March 31, 2008 to 4.46% for the quarter ended March
31, 2009.
During
the third and fourth quarters of 2008, the Company sold $450 million of interest
rate floors. The gain from sales of these interest rate floors of
$16.7 million will be recognized over the remaining lives of the various hedged
loans. During the first quarter of 2009, the Company recognized $2.9
million of interest income compared to $1.0 million of interest income
recognized in the first quarter of 2008 from the interest rate
floors.
Table
One
Average
Balance Sheets and Net Interest Income
(in
thousands)
|
|
Three
months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
portfolio (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
603,767 |
|
|
$ |
8,781 |
|
|
|
5.90 |
% |
|
$ |
601,600 |
|
|
$ |
9,886 |
|
|
|
6.61 |
% |
Home
equity
|
|
|
386,653 |
|
|
|
6,143 |
|
|
|
6.44 |
|
|
|
343,658 |
|
|
|
5,912 |
|
|
|
6.92 |
|
Commercial,
financial, and agriculture
|
|
|
756,201 |
|
|
|
10,875 |
|
|
|
5.83 |
|
|
|
700,155 |
|
|
|
12,235 |
|
|
|
7.03 |
|
Loans
to depository institutions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,670 |
|
|
|
35 |
|
|
|
3.01 |
|
Installment
loans to individuals
|
|
|
47,566 |
|
|
|
1,118 |
|
|
|
9.53 |
|
|
|
47,629 |
|
|
|
1,346 |
|
|
|
11.37 |
|
Previously
securitized loans
|
|
|
3,867 |
|
|
|
1,141 |
|
|
|
119.66 |
|
|
|
6,421 |
|
|
|
1,578 |
|
|
|
98.84 |
|
Total
loans
|
|
|
1,798,054 |
|
|
|
28,058 |
|
|
|
6.33 |
|
|
|
1,704,133 |
|
|
|
30,992 |
|
|
|
7.31 |
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
430,734 |
|
|
|
6,062 |
|
|
|
5.71 |
|
|
|
455,663 |
|
|
|
6,064 |
|
|
|
5.35 |
|
Tax-exempt
(2)
|
|
|
37,558 |
|
|
|
629 |
|
|
|
6.79 |
|
|
|
37,723 |
|
|
|
614 |
|
|
|
6.55 |
|
Total
securities
|
|
|
468,292 |
|
|
|
6,691 |
|
|
|
5.79 |
|
|
|
493,386 |
|
|
|
6,678 |
|
|
|
5.44 |
|
Deposits
in depository institutions
|
|
|
4,826 |
|
|
|
5 |
|
|
|
0.42 |
|
|
|
8,697 |
|
|
|
65 |
|
|
|
3.01 |
|
Total
interest-earning assets
|
|
|
2,271,172 |
|
|
|
34,754 |
|
|
|
6.21 |
|
|
|
2,206,216 |
|
|
|
37,735 |
|
|
|
6.88 |
|
Cash
and due from banks
|
|
|
52,410 |
|
|
|
|
|
|
|
|
|
|
|
65,442 |
|
|
|
|
|
|
|
|
|
Bank
premises and equipment
|
|
|
60,813 |
|
|
|
|
|
|
|
|
|
|
|
54,709 |
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
211,000 |
|
|
|
|
|
|
|
|
|
|
|
186,273 |
|
|
|
|
|
|
|
|
|
Less:
allowance for loan losses
|
|
|
(22,564 |
) |
|
|
|
|
|
|
|
|
|
|
(17,837 |
) |
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,572,831 |
|
|
|
|
|
|
|
|
|
|
$ |
2,494,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$ |
416,695 |
|
|
$ |
463 |
|
|
|
0.45 |
% |
|
$ |
409,745 |
|
|
$ |
712 |
|
|
|
0.70 |
% |
Savings
deposits
|
|
|
360,740 |
|
|
|
507 |
|
|
|
0.57 |
|
|
|
360,587 |
|
|
|
1,104 |
|
|
|
1.23 |
|
Time
deposits
|
|
|
982,947 |
|
|
|
8,403 |
|
|
|
3.47 |
|
|
|
933,502 |
|
|
|
10,199 |
|
|
|
4.39 |
|
Short-term
borrowings
|
|
|
147,510 |
|
|
|
153 |
|
|
|
0.42 |
|
|
|
127,793 |
|
|
|
1,145 |
|
|
|
3.60 |
|
Long-term
debt
|
|
|
19,032 |
|
|
|
254 |
|
|
|
5.41 |
|
|
|
22,505 |
|
|
|
441 |
|
|
|
7.88 |
|
Total
interest-bearing liabilities
|
|
|
1,926,924 |
|
|
|
9,780 |
|
|
|
2.06 |
|
|
|
1,854,132 |
|
|
|
13,601 |
|
|
|
2.95 |
|
Noninterest-bearing
demand deposits
|
|
|
324,333 |
|
|
|
|
|
|
|
|
|
|
|
311,885 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
35,392 |
|
|
|
|
|
|
|
|
|
|
|
28,770 |
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
286,182 |
|
|
|
|
|
|
|
|
|
|
|
300,016 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
2,572,831 |
|
|
|
|
|
|
|
|
|
|
$ |
2,494,803 |
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
24,974 |
|
|
|
|
|
|
|
|
|
|
$ |
24,134 |
|
|
|
|
|
Net
yield on earning assets
|
|
|
|
|
|
|
|
|
|
|
4.46 |
% |
|
|
|
|
|
|
|
|
|
|
4.40 |
% |
(1)
|
For
purposes of this table, non-accruing loans have been included in average
balances and loan fees, which are immaterial, have been included in
interest income.
|
(2)
|
Computed
on a fully federal tax-equivalent basis assuming a tax rate of
approximately 35%.
|
Table
Two
Rate
Volume Analysis of Changes in Interest Income and Interest Expense
(in
thousands)
|
|
Three
months ended March 31,
|
|
|
|
2009
vs. 2008
|
|
|
|
Increase
(Decrease)
|
|
|
|
Due
to Change In:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loan
portfolio
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
35 |
|
|
$ |
(1,140 |
) |
|
$ |
(1,105 |
) |
Home
equity
|
|
|
734 |
|
|
|
(503 |
) |
|
|
231 |
|
Commercial,
financial, and agriculture
|
|
|
971 |
|
|
|
(2,331 |
) |
|
|
(1,360 |
) |
Loans
to depository institutions
|
|
|
(35 |
) |
|
|
- |
|
|
|
(35 |
) |
Installment
loans to individuals
|
|
|
(2 |
) |
|
|
(226 |
) |
|
|
(228 |
) |
Previously
securitized loans
|
|
|
(622 |
) |
|
|
185 |
|
|
|
(437 |
) |
Total
loans
|
|
|
1,081 |
|
|
|
(4,015 |
) |
|
|
(2,934 |
) |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(321 |
) |
|
|
319 |
|
|
|
(2 |
) |
Tax-exempt
(1)
|
|
|
(12 |
) |
|
|
27 |
|
|
|
15 |
|
Total
securities
|
|
|
(333 |
) |
|
|
346 |
|
|
|
13 |
|
Deposits
in depository institutions
|
|
|
(29 |
) |
|
|
(31 |
) |
|
|
(60 |
) |
Total
interest-earning assets
|
|
$ |
719 |
|
|
$ |
(3,700 |
) |
|
$ |
(2,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$ |
12 |
|
|
$ |
(261 |
) |
|
$ |
(249 |
) |
Savings
deposits
|
|
|
- |
|
|
|
(597 |
) |
|
|
(597 |
) |
Time
deposits
|
|
|
536 |
|
|
|
(2,332 |
) |
|
|
(1,796 |
) |
Short-term
borrowings
|
|
|
175 |
|
|
|
(1,167 |
) |
|
|
(992 |
) |
Long-term
debt
|
|
|
(67 |
) |
|
|
(120 |
) |
|
|
(187 |
) |
Total
interest-bearing liabilities
|
|
$ |
656 |
|
|
$ |
(4,477 |
) |
|
$ |
(3,821 |
) |
Net
Interest Income
|
|
$ |
63 |
|
|
$ |
777 |
|
|
$ |
840 |
|
(1) Fully
federal taxable equivalent using a tax rate of 35%.
Allowance
and Provision for Loan Losses
Management
systematically monitors the loan portfolio and the adequacy of the allowance for
loan losses (“ALLL”) on a quarterly basis to provide for probable losses
inherent in the portfolio. Management assesses the risk in each loan type based
on historical trends, the general economic environment of its local markets,
individual loan performance, and other relevant factors. Individual credits are
selected throughout the year for detailed loan reviews, which are utilized by
management to assess the risk in the portfolio and the adequacy of the
allowance. Due to the nature of commercial lending, evaluation of the adequacy
of the allowance as it relates to these loan types is often based more upon
specific credit review, with consideration given to the potential impairment of
certain credits and historical loss rates, adjusted for general economic
conditions and other inherent risk factors. Conversely, due to the homogeneous
nature of the real estate and installment portfolios, the portions of the
allowance allocated to those portfolios are primarily based on prior loss
history of each portfolio, adjusted for general economic conditions and other
inherent risk factors.
In
evaluating the adequacy of the allowance for loan losses, management considers
both quantitative and qualitative factors. Quantitative factors include actual
repayment characteristics and loan performance, cash flow analyses, and
estimated fair values of underlying collateral. Qualitative factors generally
include overall trends within the portfolio, composition of the portfolio,
changes in pricing or underwriting, seasoning of the portfolio, and general
economic conditions.
The allowance not specifically
allocated to individual credits is generally determined by analyzing potential
exposure and other qualitative factors that could negatively impact the adequacy
of the allowance. Loans not individually evaluated for impairment are
grouped by pools with similar risk characteristics and the related historical
loss rates are adjusted to reflect current inherent risk factors, such as
unemployment, overall economic conditions, concentrations of credit, loan
growth, classified and impaired loan trends, staffing, adherence to lending
policies, and loss trends.
Determination of the allowance for loan
losses is subjective in nature and requires management to periodically reassess
the validity of its assumptions. Differences between actual losses and estimated
losses are assessed such that management can timely modify its evaluation model
to ensure that adequate provision has been made for risk in the total loan
portfolio.
As a
result of the Company’s quarterly analysis of the adequacy of the ALLL, the
Company recorded a provision for loan losses of $1.7 million in the first three
months of 2009 and $1.9 million in the first three months of
2008. The provision for loan losses recorded during the first three
months of 2009 reflects the difficulties of certain commercial borrowers of the
Company during the quarter, the downgrade of their related credits, and
management’s assessment of the impact of these difficulties on the ultimate
collectability of the loans. Changes in the amount of the provision
and related allowance are based on the Company’s detailed methodology and are
directionally consistent with changes in the growth, composition, and quality of
the Company’s loan portfolio. The Company believes its methodology
for determining its ALLL adequately provides for probable losses inherent in the
loan portfolio at March 31, 2009.
The
Company had net charge-offs of $1.9 million for the first three months of
2009. Net charge-offs on commercial and residential loans were $1.5
and $0.3 million, respectively, for the three months ended March 31,
2009. Charge-offs for commercial loans were primarily related to
three specific credits that had been appropriately considered in establishing
the allowance for loan losses in prior periods. In addition,
depository accounts net charge-offs were $0.1 million for the first three months
of 2009. While charge-offs on depository accounts are appropriately taken
against the ALLL, the revenue associated with depository accounts is reflected
in service charges.
The
Company’s ratio of non-performing assets to total loans and other real estate
owned improved from 1.64% at December 31, 2008 to 1.53% at March 31,
2009. Based on our analysis, the Company believes that the allowance
allocated to impaired loans, after considering the value of the collateral
securing such loans, is adequate to cover losses that may result from these
loans at March 31, 2009. The Company’s ratio of non-performing assets
to total loans and other real estate owned is 138 basis points lower than that
of our peer group (bank holding companies with total assets between $1 and $5
billion), which reported average non-performing assets as a percentage of loans
and other real estate owned of 2.91% for the most recently reported quarter
ended December 31, 2008.
Approximately
43% of the Company’s non-performing loans at March 31, 2009, or approximately $9
million, were associated with a $13 million portfolio of loans to builders of
speculative homes at the Greenbrier Resort in White Sulphur Springs, West
Virginia. These loans are considered to be commercial loans due to the dollar
amount of the borrowings, although the loans were used to purchase lots and to
construct upper-scale single-family residences at the Greenbrier
Resort. Construction loan terms were originally interest only for 12
months. All loans are collateralized by completed homes and eight
residential lots. Through March 31, 2009, the Company has
specifically reserved $4.0 million of the ALLL associated with this portfolio of
speculative properties. During the second quarter of 2009, two of the completed
residences and two residential lots were foreclosed and taken into the Company’s
Other Real Estate Owned. The loans associated with these properties
were included in non-performing assets at March 31, 2009. The
Greenbrier Resort has a long history and storied tradition as a top resort
destination. However, the current economic scenario has been challenging for the
Greenbrier, which lost $35 million in 2008 according to its owner, CSX
Corporation. During March 2009, the Greenbrier filed for Chapter 11 bankruptcy
reorganization and CSX Corporation announced that Marriott International was
willing to buy the Greenbrier for up to $130 million, pending court approval and
a new labor deal with Greenbrier workers. While this announcement sheds some
light on the future of the Greenbrier, the Company has considered the
uncertainty of the situation at the Greenbrier and believes that based on our
analysis, the specific allowance allocated to the non-performing and substandard
loans, after considering the value of the collateral securing such loans, is
adequate to cover losses that may result from these loans as of March 31,
2009.
In
addition to the 43% of the Company’s non-performing loans associated with
speculative builders at the Greenbrier, slightly more than 25% of the Company’s
non-performing assets are associated with real estate in what is known as the
“Eastern Panhandle” of West Virginia – the counties of Jefferson, Berkeley, and
Morgan. These three counties are distant suburbs of the Washington D.C. MSA and
have experienced explosive growth in the last 10 years. While this is a
relatively small part of the Company’s entire franchise, the downturn that has
gripped the nation’s mortgage and construction industry has had
disproportionately more impact upon the Company’s asset quality and provision in
this region than in the remainder of the Company. Exclusive of loans
to speculative builders at the Greenbrier or loans in the Eastern Panhandle,
other loans throughout the Company account for only 32% of the Company’s
non-performing loans.
The
allowance allocated to the commercial loan portfolio (see Table Five) increased
$0.3 million, or 1.8% from $15.1 million at December 31, 2008 to $15.4 at March
31, 2009. This increase was attributable to recent trends in the
quality of the Company’s commercial portfolio.
The allowance allocated to the
residential real estate portfolio (see Table Five) decreased $0.2 million, or
4.1% from $4.6 million at December 31, 2008 to $4.4 million at March
31, 2009. This decrease was primarily due to improvement in
non-performing real estate loans during the three months ended March 31,
2009.
The allowance allocated to the consumer
loan portfolio (see Table Five) remained consistent at $0.2 million at December
31, 2008 and March 31, 2009.
The allowance allocated to overdraft
deposit accounts (see Table Five) decreased $0.4 million, or 15.2% from $2.4
million at December 31, 2008 to $2.0 million at March 31, 2009. This
decrease was attributable to declines in losses experienced during the three
months ended March 31, 2009.
As
previously discussed, the carrying value of the previously securitized loans
incorporates an assumption for expected cash flows to be received over the life
of these loans. To the extent that the present value of expected cash flows is
less than the carrying value of these loans, the Company would provide for such
losses through the provision for loan losses.
Based on
the Company’s analysis of the adequacy of the allowance for loan losses and in
consideration of the known factors utilized in computing the allowance,
management believes that the allowance for loan losses as of March 31, 2009, is
adequate to provide for probable losses inherent in the Company’s loan
portfolio. Future provisions for loan losses will be dependent upon trends in
loan balances including the composition of the loan portfolio, changes in loan
quality and loss experience trends, and recoveries of previously charged-off
loans, among other factors.
Table
three
|
|
|
|
|
|
|
Analysis
of the Allowance for Loan Losses
|
|
|
|
|
|
|
Three
months ended March 31,
|
|
|
Year
ended December 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
22,254 |
|
|
$ |
17,581 |
|
|
$ |
17,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
|
(1,479 |
) |
|
|
(406 |
) |
|
|
(3,064 |
) |
Real
estate-mortgage
|
|
|
(394 |
) |
|
|
(274 |
) |
|
|
(1,590 |
) |
Installment
loans to individuals
|
|
|
(69 |
) |
|
|
(75 |
) |
|
|
(243 |
) |
Overdraft
deposit accounts
|
|
|
(664 |
) |
|
|
(984 |
) |
|
|
(3,151 |
) |
Total
charge-offs
|
|
|
(2,606 |
) |
|
|
(1,739 |
) |
|
|
(8,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
|
29 |
|
|
|
13 |
|
|
|
38 |
|
Real
estate-mortgage
|
|
|
81 |
|
|
|
27 |
|
|
|
223 |
|
Installment
loans to individuals
|
|
|
55 |
|
|
|
108 |
|
|
|
296 |
|
Overdraft
deposit accounts
|
|
|
517 |
|
|
|
694 |
|
|
|
1,741 |
|
Total
recoveries
|
|
|
682 |
|
|
|
842 |
|
|
|
2,298 |
|
Net
charge-offs
|
|
|
(1,924 |
) |
|
|
(897 |
) |
|
|
(5,750 |
) |
Provision
for loan losses
|
|
|
1,650 |
|
|
|
1,883 |
|
|
|
10,423 |
|
Balance
at end of period
|
|
$ |
21,980 |
|
|
$ |
18,567 |
|
|
$ |
22,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a Percent of Average Total Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs (annualized)
|
|
|
(0.43 |
)% |
|
|
(0.21 |
)% |
|
|
(0.33 |
)% |
Provision
for loan losses (annualized)
|
|
|
0.37 |
% |
|
|
0.44 |
% |
|
|
0.60 |
% |
As
a Percent of Non-Performing Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
107.44 |
% |
|
|
113.55 |
% |
|
|
86.07 |
% |
Table
four
|
|
|
|
|
|
|
Non-Performing
Assets
|
|
|
|
|
|
|
|
|
As
of March 31,
|
|
|
As
of
December
31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans
|
|
$ |
20,007 |
|
|
$ |
15,840 |
|
|
$ |
25,224 |
|
Accruing
loans past due 90 days or more
|
|
|
386 |
|
|
|
257 |
|
|
|
623 |
|
Previously
securitized loans past due 90 days or more
|
|
|
64 |
|
|
|
255 |
|
|
|
10 |
|
Total
non-performing loans
|
|
|
20,457 |
|
|
|
16,352 |
|
|
|
25,857 |
|
Other
real estate, excluding property associated withpreviously securitized
loans
|
|
|
6,686 |
|
|
|
4,192 |
|
|
|
3,469 |
|
Other
real estate associated with previouslysecuritized loans
|
|
|
374 |
|
|
|
148 |
|
|
|
400 |
|
Total other real estate
owned
|
|
|
7,060 |
|
|
|
4,340 |
|
|
|
3,869 |
|
Total non-performing
assets
|
|
$ |
27,517 |
|
|
$ |
20,692 |
|
|
$ |
29,726 |
|
Table
five
|
|
|
|
|
|
|
Allocation
of the Allowance For Loan Losses
|
|
|
|
|
|
|
As
of March 31,
|
|
|
As
of
December
31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
$ |
15,398 |
|
|
$ |
11,682 |
|
|
$ |
15,128 |
|
Real
estate-mortgage
|
|
|
4,395 |
|
|
|
4,038 |
|
|
|
4,583 |
|
Installment
loans to individuals
|
|
|
192 |
|
|
|
298 |
|
|
|
190 |
|
Overdraft
deposit accounts
|
|
|
1,995 |
|
|
|
2,549 |
|
|
|
2,353 |
|
Allowance
for Loan Losses
|
|
$ |
21,980 |
|
|
$ |
18,567 |
|
|
$ |
22,254 |
|
Previously
Securitized Loans
As of March 31, 2009, the Company
reported a carrying value of previously securitized loans of $3.8 million, while
the actual outstanding contractual balance of these loans was $18.3 million. The
Company accounts for the difference between the carrying value and the total
expected cash flows of previously securitized loans as an adjustment of the
yield earned on these loans over their remaining lives. The discount is accreted
to income over the period during which payments are probable of collection and
are reasonably estimable. If, upon periodic evaluation, the estimate of the
total probable collections is increased or decreased but is still greater than
the sum of the original carrying amount less subsequent collections plus the
discount accreted to date, and it is probable that collection will occur, the
amount of the discount to be accreted is adjusted accordingly and the amount of
periodic accretion is adjusted over the remaining lives of the loans. If, upon
periodic evaluation, the discounted present value of estimated future cash flows
declines below the recorded value of previously securitized loans, an impairment
charge would be provided through the Company’s provision for loan
losses.
During
the three months ended March 31, 2009 and for the year ended December 31, 2008,
the Company has experienced net recoveries on these loans primarily due to
increased collection efforts. Subsequent to our assumption of the
servicing of these loans during 2005, the Company has averaged net recoveries,
but does not believe that the trend of net recoveries can be sustained
indefinitely.
During
the first three months of 2009 and 2008, the Company recognized $1.1 million and
$1.6 million, respectively, of interest income on its previously securitized
loans. Cash receipts for the three months ended March 31, 2009 and
2008 are summarized in the following table:
|
Three
months ended
March 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Principal
receipts
|
|
$ |
968 |
|
|
$ |
3,038 |
|
Interest
income receipts
|
|
|
587 |
|
|
|
899 |
|
Total
cash receipts
|
|
$ |
1,555 |
|
|
$ |
3,937 |
|
Based on
current cash flow projections, the Company believes that the carrying value of
previously securitized loans will approximate:
As
of:
|
Estimated
Balance:
|
|
|
December
31, 2009
|
$4
million
|
December
31, 2010
|
3
million
|
December
31, 2011
|
3
million
|
December
31, 2012
|
2
million
|
Non-Interest
Income and Non-Interest Expense
Three
Months Ended March 31, 2009 vs. 2008
Non-Interest
Income: During the first three
months of 2009, the Company recorded $2.2 million of investment impairment
losses. The charges deemed to be other than temporary were related to
pooled bank trust preferreds with a remaining book value of $8.9 million at
March 31, 2009. The impairment charges related to the pooled bank
trust preferred securities were based on the Company’s quarterly review of its
investment securities for indications of losses considered to be other than
temporary. Based on management’s assessment of the securities the
Company owns, the seniority position of the securities within the pools, the
level of defaults and deferred payments within the pools, and a review of the
financial strength of the banks within the respective pools, management
concluded that impairment charges of $2.2 million on the pooled bank trust
preferred securities were necessary for the quarter ended March 31,
2009.
Exclusive
of other than temporary investment impairment losses and the gain from the Visa
initial public offering in the first quarter of 2008, non-interest income
increased $0.5 million to $14.5 million in the first three months of 2009 as
compared to $14.0 million in the first three months of
2008. Insurance commission revenues increased $0.9 million, or 86.2%,
from $1.0 million during the first quarter of 2008 to $1.9 million during the
first quarter of 2009 due to contingency payments and new
business. Partially offsetting this increase was a decrease of $0.8
million, or 7.4%, in service charges from depository accounts. This
decrease is attributable to a general nationwide decline in consumer
spending.
Non-Interest
Expense: Excluding the loss on
the early redemption of the trust preferred securities in the first quarter of
2008, non-interest expenses increased $0.1 million from $18.7 million in the
first quarter of 2008 to $18.8 million in the first quarter of
2009. Occupancy and equipment increased $0.3 million, or 19.5%, from
the first quarter of 2008 due to an upgrade of the Company’s core processing
system and increased occupancy expenses, while salaries and employee benefits
increased $0.2 million, or 2.3%, from the first quarter of 2008. In
addition, advertising expenses rose $0.2 million from the first quarter of
2008. Partially offsetting these increases was a decline in other
expenses of $1.1 million due in part to increased
special charitable contributions of approximately $0.5 million during the first
quarter of 2008.
Income
Tax Expense: The Company’s effective
income tax rate for the first quarter of 2009 was 34.6% compared to 25.2% for
the year ended December 31, 2008, and 33.0% for the quarter ended March 31,
2008. The effective rate is based upon the Company’s expected tax
rate for the year ending December 31, 2009. The increase in the
effective income tax rate is largely attributable to revisions in the West
Virginia state tax code that are effective for the 2009 calendar
year.
Risk
Management
Market risk is the risk of loss due to
adverse changes in current and future cash flows, fair values, earnings or
capital due to adverse movements in interest rates and other factors, including
foreign exchange rates and commodity prices. Because the Company has no
significant foreign exchange activities and holds no commodities, interest rate
risk represents the primary risk factor affecting the Company’s balance sheet
and net interest margin. Significant changes in interest rates by the Federal
Reserve could result in similar changes in LIBOR interest rates, prime rates,
and other benchmark interest rates that could affect the estimated fair value of
the Company’s investment securities portfolio, interest paid on the Company’s
short-term and long-term borrowings, interest earned on the Company’s loan
portfolio and interest paid on its deposit accounts.
The
Company’s Asset and Liability Committee (“ALCO”) has been delegated the
responsibility of managing the Company’s interest-sensitive balance sheet
accounts to maximize earnings while managing interest rate risk. ALCO, comprised
of various members of executive and senior management, is also responsible for
establishing policies to monitor and limit the Company’s exposure to interest
rate risk and to manage the Company’s liquidity position. ALCO satisfies its
responsibilities through monthly meetings during which product pricing issues,
liquidity measures, and interest sensitivity positions are
monitored.
In order
to measure and manage its interest rate risk, the Company uses an
asset/liability management and simulation software model to periodically update
the interest sensitivity position of the Company’s balance sheet. The model is
also used to perform analyses that measure the impact on net interest income and
capital as a result of various changes in the interest rate environment. Such
analyses quantify the effects of various interest rate scenarios on projected
net interest income.
The
Company’s policy objective is to avoid negative fluctuations in net income or
the economic value of equity of more than 15% within a 12-month period, assuming
an immediate parallel increase or decrease of 300 basis points. The Company
measures the long-term risk associated with sustained increases and decreases in
rates through analysis of the impact to changes in rates on the economic value
of equity. Due to the current Federal Funds target rate of 25 basis
points, the Company has chosen not to reflect a decrease of 25 basis points from
current rates in its analysis.
During
2005 and 2006, the Company entered into interest rate floors with a total
notional value of $600 million, with maturities between May 2008 and June
2011. These derivative instruments provided the Company protection
against the impact of declining interest rates on future income streams from
certain variable rate loans. During 2008, interest rate floors with a
total notional value of $150 million matured. The remaining interest
rate floors with a total notional value of $450 million were sold during
2008. The gains from the sales of these interest rate floors will be
recognized over the remaining lives of the various hedged loans. At
March 31, 2009, the unrecognized gain was approximately $12.4
million.
The following
table summarizes the sensitivity of the Company’s net income to various interest
rate scenarios. The results of the sensitivity analyses presented below differ
from the results used internally by ALCO in that, in the analyses below,
interest rates are assumed to have an immediate and sustained parallel shock.
The Company recognizes that rates are volatile, but rarely move with immediate
and parallel effects. Internally, the Company considers a variety of interest
rate scenarios that are deemed to be possible while considering the level of
risk it is willing to assume in “worst-case” scenarios such as shown by the
following:
Immediate
Basis
Point Change
in
Interest Rates
|
|
|
Implied
Federal Funds Rate Associated with Change in Interest
Rates
|
|
|
Estimated
Increase
(Decrease)
in
Net
Income Over 12 Months
|
|
|
Estimated
Increase
(Decrease)
in
Economic
Value of
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
+300 |
|
|
|
3.25 |
% |
|
|
+11.9 |
% |
|
|
+19.9 |
% |
|
+200 |
|
|
|
2.25 |
|
|
|
+7.4 |
|
|
|
+13.1 |
|
|
+100 |
|
|
|
1.25 |
|
|
|
+3.0 |
|
|
|
+5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300 |
|
|
|
3.25 |
% |
|
|
+9.2 |
% |
|
|
+7.0 |
% |
|
+200 |
|
|
|
2.25 |
|
|
|
+6.3 |
|
|
|
+4.4 |
|
|
+100 |
|
|
|
1.25 |
|
|
|
+3.2 |
|
|
|
+1.1 |
|
These
estimates are highly dependent upon assumptions made by management, including,
but not limited to, assumptions regarding the manner in which interest-bearing
demand deposit and saving deposit accounts reprice in different interest rate
scenarios, pricing behavior of competitors, prepayments of loans and deposits
under alternative rate environments, and new business volumes and pricing. As a
result, there can be no assurance that the results above will be achieved in the
event that interest rates increase during 2009 and beyond. The
results above do not necessarily imply that the Company will experience
decreases in net income if market interest rates rise. The table
above indicates how the Company’s net income and the economic value of equity
behave relative to an
increase in rates compared to what would otherwise occur if rates remain
stable.
Based
upon the results above, the Company believes that its net income is positively
correlated with increasing rates as compared to the level of net income the
Company would expect if interest rates remain flat.
Liquidity
The
Company evaluates the adequacy of liquidity at both the Parent Company level and
at City National. At the Parent Company level, the principal source of cash is
dividends from City National. Dividends paid by City National to the Parent
Company are subject to certain legal and regulatory limitations. Generally, any
dividends in amounts that exceed the earnings retained by City National in the
current year plus retained net profits for the preceding two years must be
approved by regulatory authorities. During 2007 and 2008, City National received
regulatory approval to pay $88.6 million of cash dividends to the Parent
Company, while generating net profits of $78.1 million. Therefore,
City National will be required to obtain regulatory approval prior to declaring
any cash dividends to the Parent Company during 2009. Although
regulatory authorities have approved prior cash dividends, there can be no
assurance that future dividend requests will be approved.
The
Parent Company used cash obtained from the dividends received primarily to: (1)
pay common dividends to shareholders, (2) remit interest payments on the
Company’s trust-preferred securities, and (3) fund repurchase of the Company’s
common shares.
Over the next 12 months, the Parent
Company has an obligation to remit interest payments approximating $0.8 million
on the junior subordinated debentures held by City Holding Capital Trust III.
Additionally, the Parent Company anticipates continuing the payment of
dividends, which are expected to approximate $21.6 million on an annualized
basis over the next 12 months based on common shareholders of record at March
31, 2009. However, interest payments on the debentures can be
deferred for up to five years under certain circumstances and dividends to
shareholders can, if necessary, be suspended. In addition to these
anticipated cash needs, the Parent Company has operating expenses and other
contractual obligations, which are estimated to require $0.9 million of
additional cash over the next 12 months. As of March 31, 2009, the Parent
Company reported a cash balance of $5.7 million and management believes that the
Parent Company’s available cash balance, together with cash dividends from City
National will be adequate to satisfy its funding and cash needs over the next
twelve months.
Excluding the interest and dividend
payments discussed above, the Parent Company has no significant commitments or
obligations in years after 2009 other than the repayment of its $16.5 million
obligation under the debentures held by City Holding Capital Trust III. However,
this obligation does not mature until June 2038, or earlier at the option of the
Parent Company. It is expected that the Parent Company will be able to obtain
the necessary cash, either through dividends obtained from City National or the
issuance of other debt, to fully repay the debentures at their
maturity.
City National manages its liquidity
position in an effort to effectively and economically satisfy the funding needs
of its customers and to accommodate the scheduled repayment of borrowings. Funds
are available to City National from a number of sources, including depository
relationships, sales and maturities within the investment securities portfolio,
and borrowings from the FHLB and other financial institutions. As of March 31,
2009, City National’s assets are significantly funded by deposits and capital.
Additionally, City National maintains borrowing facilities with the FHLB and
other financial institutions that are accessed as necessary to fund operations
and to provide contingency funding mechanisms. As of March 31, 2009, City
National has the capacity to borrow an additional $408.4 million from the FHLB
and other financial institutions under existing borrowing facilities. City
National maintains a contingency funding plan, incorporating these borrowing
facilities, to address liquidity needs in the event of an institution-specific
or systemic financial industry crisis. Also, City National maintains a
significant percentage (94.0%, or $459.0 million at March 31, 2009) of its
investment securities portfolio in the highly liquid available-for-sale
classification. Although it has no current intention to do so, these securities
could be liquidated, if necessary, to provide an additional funding
source. City National also segregates certain mortgage loans,
mortgage-backed securities, and other investment securities in a separate
subsidiary so that it can separately monitor the asset quality of these
primarily mortgage-related assets, which could be used to raise cash through
securitization transactions or obtain additional equity or debt financing if
necessary.
The Company manages its asset and
liability mix to balance its desire to maximize net interest income against its
desire to minimize risks associated with capitalization, interest rate
volatility, and liquidity. With respect to liquidity, the Company has chosen a
conservative posture and believes that its liquidity position is strong. The
Company’s net loan to asset ratio is 68.5% as of March 31, 2009 and deposit
balances fund 82.3% of total assets. The Company has obligations to extend
credit, but these obligations are primarily associated with existing home equity
loans that have predictable borrowing patterns across the portfolio. The Company
has significant investment security balances that totaled $488.1 million at
March 31, 2009, and that greatly exceeded the Company’s non-deposit sources of
borrowing which totaled $177.1 million. Further, the Company’s
deposit mix has a very high proportion of transaction and savings accounts that
fund 43.1% of the Company’s total assets.
As
illustrated in the Consolidated Statements of Cash Flows, the Company generated
$5.8 million of cash from operating activities during the first three months of
2009, primarily from interest income received on loans and investments, net of
interest expense paid on deposits and borrowings. The Company used
$24.9 million of cash in investing activities during the first three months of
2009 primarily for the purchase of money market and mutual fund securities and
to fund additional loans, net of proceeds from these securities and from
maturities and calls of securities available-for-sale. The Company
generated $7.9 million of cash in financing activities during the first three
months of 2009, primarily from cash dividends paid to the Company’s common
stockholders of $5.4 million, and the purchase of treasury stock of $1.2
million.
Capital
Resources
During the first three months of 2009,
Shareholders’ Equity increased $1.1 million, or 3.9%, from $280.4 million at
December 31, 2008 to $281.5 million at March 31, 2009. This increase
was primarily due to reported net income of $10.9
million. This increase was partially offset by dividends
declared during the year of $5.4 million, unrealized losses on interest rate
floors of $1.8 million, unrealized losses on available-for-sale securities of
$1.7 million, and common stock purchases of $1.2 million.
During August 2007, the Board of
Directors authorized the Company to buy back up to 1,000,000 shares of its
common shares (approximately 6% of outstanding shares) in open market
transactions at prices that are accretive to the earnings per share of
continuing shareholders. No time limit was placed on the duration of
the share repurchase program. 49,363 shares were repurchased during the first
three months of 2009 and there can be no assurance that the Company will
continue to reacquire its common shares or to what extent the repurchase program
will be successful. As of March 31, 2009, the Company may repurchase
an additional 156,065 shares from time to time depending on market conditions
under the authorization.
Regulatory guidelines require the
Company to maintain a minimum total capital to risk-adjusted assets ratio of
8.0%, with at least one-half of capital consisting of tangible common
stockholders’ equity and a minimum Tier I leverage ratio of 4.0%. Similarly,
City National is also required to maintain minimum capital levels as set forth
by various regulatory agencies. Under capital adequacy guidelines, City National
is required to maintain minimum total capital, Tier I capital, and leverage
ratios of 8.0%, 4.0%, and 4.0%, respectively. To be classified as “well
capitalized,” City National must maintain total capital, Tier I capital, and
leverage ratios of 10.0%, 6.0%, and 5.0%, respectively.
The
Company’s regulatory capital ratios remained strong for both City Holding and
City National as illustrated in the following table:
|
|
|
|
|
|
|
|
Actual
|
|
|
|
|
|
|
Well-
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
Minimum
|
|
|
Capitalized
|
|
|
2009
|
|
|
2008
|
|
City
Holding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8.0 |
% |
|
|
10.0 |
% |
|
|
13.5 |
% |
|
|
13.4 |
% |
Tier
I Risk-based
|
|
|
4.0 |
|
|
|
6.0 |
|
|
|
12.3 |
|
|
|
12.3 |
|
Tier
I Leverage
|
|
|
4.0 |
|
|
|
5.0 |
|
|
|
9.4 |
|
|
|
9.5 |
|
City
National:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8.0 |
% |
|
|
10.0 |
% |
|
|
11.3 |
% |
|
|
11.5 |
% |
Tier
I Risk-based
|
|
|
4.0 |
|
|
|
6.0 |
|
|
|
10.1 |
|
|
|
10.3 |
|
Tier
I Leverage
|
|
|
4.0 |
|
|
|
5.0 |
|
|
|
7.7 |
|
|
|
8.0 |
|
The
information called for by this item is provided under the caption “Risk
Management” under Item 2—Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934, the Company carried out an evaluation, with the
participation of the Company’s management, including
the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company’s disclosure controls and procedures (as defined under Rule 13a-15(e)
under the Securities Exchange Act of 1934) as of the end of the period covered
by this report. Based upon that evaluation, the Company’s Chief Executive Officer
and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Company’s periodic SEC
filings. There has been no change in the Company’s internal control
over financial reporting during the quarter ended March 31, 2009 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Item
1.
|
|
|
|
|
|
The
Company is engaged in various legal actions that it deems to be in the
ordinary course of business. The Company believes that it has adequately
provided for probable costs of current litigation. As these legal actions
are resolved, however, the Company could realize positive and/or negative
impact to its financial performance in the period in which these legal
actions are ultimately decided. There can be no assurance that current
actions will have immaterial results, either positive or negative, or that
no material actions may be presented in the future.
|
|
|
|
|
|
Item
1A.
|
|
|
|
|
|
|
|
|
|
There
have been no material changes to the factors disclosed in Item 1A. Risk
Factors in our Annual Report on Form 10-K for the year ended December 31,
2008.
|
|
Item
2.
|
|
|
|
|
|
|
|
|
|
The
following table sets forth information regarding the Company’s common
stock repurchases transacted during the
quarter:
|
Period
|
Total
Number
Of
Shares
Purchased
|
Average
Price
Paid
per
Share
|
Total
Number
of
Shares
Purchased
as
Part of
Publicly
Announced
Plans
Or
Programs (a)
|
Maximum
Number
of
Shares
that
May
Yet Be
Purchased
Under
the
Plans
or
Programs
|
January
1 – January 31, 2009
|
--
|
--
|
--
|
205,428
|
|
|
|
|
|
February
1 – February 28, 2009
|
16,963
|
25.23
|
16,963
|
188,465
|
|
|
|
|
|
March
1 – March 31, 2009
|
32,400
|
25.12
|
32,400
|
156,065
|
|
|
|
|
|
(a) In August
2007, the Company announced that the Board of Directors had authorized the
Company to buy back up to 1,000,000 shares of its common stock, in open
market transactions at prices that are accretive to continuing
shareholders. No timetable was placed on the duration of this
share repurchase
program.
|
Item
3.
|
|
|
|
None.
|
|
|
|
|
|
Item
4.
|
|
|
|
None.
|
|
|
|
|
|
Item
5.
|
|
|
|
None.
|
|
|
|
|
|
Item
6.
|
|
|
|
|
|
(a)
Exhibits
|
|
|
|
|
31(a)
|
|
|
|
|
|
31(b)
|
|
|
|
|
|
32(a)
|
|
|
|
|
|
32(b)
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
City
Holding Company
|
|
(Registrant)
|
|
|
|
/s/
Charles R. Hageboeck
|
|
Charles
R. Hageboeck
|
President
and Chief Executive Officer
|
(Principal
Executive Officer)
|
|
|
|
/s/
David L. Bumgarner
|
|
David
L. Bumgarner
|
Senior
Vice President, Chief Financial Officer and Principal Accounting
Officer
|
(Principal
Financial Officer)
|
|
|
|
Date: May
6, 2009
35